Personal loans provide a solution to a variety of problems. From lumping multiple debts together in a single monthly payment to covering an unexpected expense, borrowing a small amount offers the opportunity to manage debts more efficiently. Unfortunately, the people who could most benefit from this type of loan feel reluctant. Common misconceptions leave the average person feeling wary of loans. By learning the truth about common myths, you’ll feel better prepared to take advantage of personal loans when you need them the most.
It’s Hard to Qualify For a Personal Loan
You won’t need to use assets as collateral to qualify for an unsecured personal loan. This also means you won’t have to worry about losing a home, vehicle, or another asset if you fall behind on your loan payments. As long as you can verify a steady source of income and have a decent credit score, you can qualify for a personal loan. Some lenders will still approve loans for borrowers with poor credit as long as they can demonstrate that they meet income requirements.
It Takes a Long Time to Get the Money
When you use a home or vehicle to obtain a secured loan, the lender vets those assets to ensure you are the legal owner. This is one reason it can take several weeks up to a few months to get a secured loan. Lenders can process unsecured personal loans much faster since they’re not handling assets as collateral. Most applications get approved within a day. If it takes longer to verify your income or address, the application process can take a little longer. Even in these situations, it rarely takes more than a couple of weeks to process a personal loan application.
Interest Rates on Personal Loans Are Too High
Most people incorrectly assume it’s better to use a credit card for an emergency since there’s a myth that credit card interest rates are lower. TransUnion’s second quarter report for 2024 showed that there were 545.1 million active credit card accounts compared to 25.8 million personal loan accounts. In truth, you’ll pay less interest on a personal loan. Credit card interest rates stay around 20% on average. When it comes to personal loans, borrowers should expect to pay an average 12.31% interest rate.
Personal Loans and Payday Loans Are the Same
This myth might be the most harmful for both lenders and borrowers since payday loans have a bad reputation for being predatory. That’s because payday loans involve three-digit APRs that force borrowers into cycles of repaying and renewing the same loans over and over. That’s not the case with a personal loan. Since the average rate for a personal loan is around 12.31%, it’s easier to repay the full amount on time. While borrowers have one or two weeks to repay payday loans, a personal loan repayment schedule ranges from two years up to 12 years. A higher loan will come with a longer repayment term.
Your Personal Loan Can Cover the Down Payment on a Home Purchase
Mortgage lenders want to make sure a borrower can repay their home loan on time. The primary purpose of requiring a down payment is to demonstrate your ability to manage money and save for important life events. For this reason, mortgage lenders have strict rules that prohibit the use of credit cards and unsecured loans as sources for paying mortgage down payments. Lenders assume an applicant isn’t financially ready to buy a home if they can’t save some money for a down payment. The only way around paying a 20% down payment is by looking for a government program that allows borrowers to pay a low or zero down payment. However, those programs usually come with higher interest rates.
You Can Use a Personal Loan to Pay Your College Tuition
Most lenders will declare that borrowers can use their personal loans for any legal purpose. Taking a closer look at the fine print will reveal that the statement excludes using the money to cover college tuition. In addition, you may not want to use a personal loan for this purpose. Student loans are specifically designed for individuals who may not work full-time while pursuing their educations. Some protections you’ll only get with a student loan include deferments, income-based repayment plans, and loan forgiveness. You will also pay a lower rate on a student loan. Experian reports personal loans ranging from 7-36% while student loans range from 3.5-18% on average.
It’s a Bad Idea to Use Personal Loans to Cover Your Living Expenses
As a rule, you shouldn’t use personal loans to cover your living expenses on a consistent basis. This will lead to extreme debt and a devastating financial situation. However, a one-time personal loan can help you recover after experiencing a financial emergency. A sudden need for medical care, legal representation, home repairs, or similar emergencies can wipe out your savings. Consider using a personal loan to recover. You’ll repay the loan over a period of several years, giving you more than enough time to replenish your savings.
You Must Borrow From Your Bank
Many people assume they can only borrow from the same bank they use to host their checking and savings accounts. This is far from the truth. You should take the time to look for other lenders. Compare the rates and repayment terms for each lender. In addition, there is peer lending, crowdfunding, and a variety of alternatives that fall under the category of personal loans. While you should research any lender you plan to use, it can help to learn about a variety of options.
Borrow Wisely and Get Closer to Financial Freedom
As with any commercial product, personal loans come with a variety of options. Taking the time to research loans from a variety of lenders can help you find a loan that offers the most favorable terms. A loan with good terms can help you solve your financial problems sooner, leaving you with a clear path to a brighter future.